METU STUDIES IN DEVELOPMENT

Transcription

1 ODTlJ GELI~.M.E DERGISI METU STUDIES IN DEVELOPMENT Cil' Volume 22 Say, Numl>cr 4 y" Year 1995 MAKALELER I ARTICLES Haluk AKIlO(;AN Ne'-;n AKIlOCAN Turk SClmaye Pjya~a'l' Ve,el veya Ulu,Ia,araJ:a Risk Da~lhml II. Ilaturalp CANIWMiR Military Ex~ndjt"res and Economic Performance: A Survey of Literature and the Case of Turkey Rolll'rl E. LOONEY M~crocconomic Constraints on Private Seclor InveSlment in Pakistan Ayd,n ()ZKAN Economics of lnsolwnq Proced...s: A Gamc.Th,'orclic Approoch CrQl;S- Ref<; rmcing lmn Through the Pa't Historiographies: Prism of OUoman Suhe,la OZYILIlIRIM Optimal Monclmy "nll Fi"C,,1 Polides: A SU"'"y S. Arto WASTI Kiiltiircl farkhla~nwlln Orgiil.><:1 Yapr,-c D;lVram~a BLI inedcm" Elkilcri: KaI~lla llnnah UMTII [)()Cu TH.NIK ljnivfrsitesi IK'I'IS,\l)1 \'E 1l),\RI HIUMLER rakuln:s1 MIl}OLE A.'H TECHNICAL UNIVfRSn"Y FACULTY OF LCONOMTC "NO AI>MINISTR,\TIVE SCIUKES

2 Report Documentation Page Form Approved OMB No Public reporting burden for the collection of information is estimated to average 1 hour per response, including the time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information. Send comments regarding this burden estimate or any other aspect of this collection of information, including suggestions for reducing this burden, to Washington Headquarters Services, Directorate for Information Operations and Reports, 1215 Jefferson Davis Highway, Suite 1204, Arlington VA Respondents should be aware that notwithstanding any other provision of law, no person shall be subject to a penalty for failing to comply with a collection of information if it does not display a currently valid OMB control number. 1. REPORT DATE REPORT TYPE 3. DATES COVERED to TITLE AND SUBTITLE Macroeconomic Constraints on Private Sector Investment in Pakistan 5a. CONTRACT NUMBER 5b. GRANT NUMBER 5c. PROGRAM ELEMENT NUMBER 6. AUTHOR(S) 5d. PROJECT NUMBER 5e. TASK NUMBER 5f. WORK UNIT NUMBER 7. PERFORMING ORGANIZATION NAME(S) AND ADDRESS(ES) Naval Postgraduate School,Monterey,CA 8. PERFORMING ORGANIZATION REPORT NUMBER 9. SPONSORING/MONITORING AGENCY NAME(S) AND ADDRESS(ES) 10. SPONSOR/MONITOR S ACRONYM(S) 12. DISTRIBUTION/AVAILABILITY STATEMENT Approved for public release; distribution unlimited 13. SUPPLEMENTARY NOTES 14. ABSTRACT 11. SPONSOR/MONITOR S REPORT NUMBER(S) 15. SUBJECT TERMS 16. SECURITY CLASSIFICATION OF: 17. LIMITATION OF ABSTRACT a. REPORT unclassified b. ABSTRACT unclassified c. THIS PAGE unclassified Same as Report (SAR) 18. NUMBER OF PAGES 28 19a. NAME OF RESPONSIBLE PERSON Standard Form 298 (Rev. 8-98) Prescribed by ANSI Std Z39-18

3 METU Studies in Development, 22 (4) 1995, j,ljlfj:)iti1.a~ "_."".. n_ Macroeconomic constraints on private sector investment in Pakistan Robert E. Looney Department of National Security Affairs. Naval Postgraduate School, Monterey, California USA Abstract The purpose of this paper is to assess the manner in which the Government's fiscal polices affect the willingness of the private sector to invest, especially in the all-important manufacturing sector. Using an optimal control analysis to examine alternative fiscal packages, it is shown that proper economic management can return the country to a high growth path while avoiding many of the imbalances that have characterized recent economic performance. This analysis suggests that deficit reduction must be the key element in any future policy package. 1. Introduction The recent economic difficulties facing Pakistan -widening fiscal and current account deficits, growing foreign debt burden, and slowing growth rates- have led to a fundamental assessment of the country's adjustment and development strategy. Specifically the sentiment in economic and policy making circles has shifted against large-scale government intervention and toward greater reliance on the market in the allocation and use of resources (Kahn and Reinhart, 1990: 19). Conventional wisdom is that the way to prosperity, as represented by a sustained higher rate of economic growth requires stable and conservative macroeconomic policies, liberalization of the goods and factor markets, greater flexibility in the financial system, and an enhanced role for the private system in economic activity.

4 398 Robert E. LOONEY Even if it can be assumed that an increase in private investment, other things being equal, has an unambiguous positive effect on output, it is still necessary to establish how private investment in Pakistan is determined -in particular, what variables systematically affect it- before one can evaluate the influence that government can exercise over private investment decision. The purpose of this paper is to undertake this examination, particularly as it pertcains to private sector investment in manufacturing. Ultimately our objective is to integrate the private investment decision into a macroeconomic forecasting model. In turn this model witl be used to assess the manner in which the Pakistani economy might evolve under alternative policy packages. The philosophy underlying this approach stresses -" the importance of examining private sector investment in the context of the government's overall development and budgetary strategies. I ' '. 2. Macro-imbalances Although Pakistan's growth performance during the was healthy (averaging more then 6% per annum), and inflation, while fluctuating considerably was generally moderate (averaging 7% per annum), the increasing macroeconomic imbalances, growth of public sector deficits and indebtedness, and underlying structural weaknesses convinced the Government that without corrective action the economy's growth performance could not be sustained. Accordingly, in early Fiscal Year 1989 (FY89) the government embarked on a macroeconomic structural adjustment program which has been implemented more or less continuously up to the present time. The Government realized that the economy's main weaknesses were: (i) low savings and investment rates, particularly in the public sector, (ii) structural rigidities and distortions in the incentive system, which reduced efficiency and depressed economic activity, and (iii) limited progress in education, health and nutrition. Among the most important issues to be addressed through the reform effort were the following: a. Fiscal Policy. Pressure the fiscal accounts increased during the 1980s and the budget deficit reached an uhsustainable 8.5% of GDP in Fiscal Year 1988 (FY88). One factor behind this deterioration was stagnant public revenues heavily dependent on trade taxes and inelastic domestic taxes. Despite the growing deficits, t;xpenditures to build, and maintain and operate key development program/projects in the social sectors and infrastructure were inadequate. Non-development expenditures, in particular interest ~.' '"

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